How burning tokens can increase the return for stakers
There has always been a discussion whether burning tokens is a good idea to increase the price of a token or not. On the one hand the burning of the token reduces the supply and should therefore increase prices with a stable demand. Others say that burning doesn't bring much because what really helps a token evolve is an increase in demand.
I think that both views are not totally wrong and I couldn't really say one side is right and the other is wrong.
Why burning tribe tokens is positive for token holders
I wanted to look at it from another perspective. The tribe tokens on the second layer of Hive, have for most of them a similar supply evolution. New tokens are minted on a linear basis. For some tokens, there is a supply reduction built in, others don't have it.
Let's keep in mind that the minting is directly related to the stake of the users. The users with their stake, allocate the new minted tokens. There is a direct relationship here between stakers and supply.
What I wanted to figure out is the effect that burning has on stake holders. For that I took the example of the CTP tribe with which I'm very familiar.
Let's look at the basics of the CTP token:
Every day 3951 new CTP tokens are minted. 15% of these tokens are issued through the miners (CTPM) and 85% through curation and author rewards. In the CTP tribe, authors get 60% of the rewards and curators get 40% of it.
At the moment there is a total supply of 3'815'762 tokens that were minted. Of these tokens 107'000 were sent to @null which means that they were burnt. This gives us a circulating supply of 3'708'762 tokens.
To look at the effect that burning has on the token, I made the calculation of what would be the inflation rate without burning and with burning:
3951 x 365 / 3'815'762 = 37.79%
3951 x 365 / (3'815'762 – 107'000) = 38.88%
This means that with the burning of 107'000 tokens (2.8% of the supply) that took place, the inflation rate of the token is actually increased by 1%. This means that the return for stake holders is also 1% higher! Of course there are also other factors that come into play, like the staking rate and voting rate, etc. But all other things being equal, people who curate with their stake will have a better return if tokens are burnt.
Without burning, the inflation rate of hive-engine tokens becomes smaller over time. If you stake a token then your return will diminish the more tokens are in circulation. This makes the tokens less interesting in a world where maximal APR is looked for. Burning tokens and reducing the circulating supply can help to keep the token more attractive and offer a higher return for people staking it.
In my opinion, burning tokens has therefore a double meaning. They reduce the supply on the market and at the same time, they make the token more interesting by giving more APR for stakers.
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